How Well-Targeted Are Payroll Tax Cuts as a Response to COVID-19? Evidence from China

Abstract

Numerous countries cut payroll taxes in response to COVID-19, including China, which re-duced employer contributions by 21 percentage points. We use administrative data on 900,000firms to evaluate payroll tax cuts as a business relief measure. We estimate that the tax cutscover 31.5% of the decline in business cash flow, but labor informality causes 53% of regis-tered firms—24% of aggregate economic activity—to receive no benefits at all. We quantifythe targeting of the policy in terms of how much benefits flow to small firms less able to accessexternal finance and to sectors worse hit by COVID-19. We find that (1) small firms and vul-nerable industries are comparatively more labor intensive, which leads to desirable targeting;(2) labor informality worsens, but does not eliminate, targeting by firm size; and (3) labor in-formality is uncorrelated with the COVID-19 shock, and therefore does not affect targeting bysector.